Investment Strategies

Steering A Careful Course Around Credit Amid Volatile Times

Tom Burroughes, Group Editor, 20 April 2022

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We talk about rising rates, hot inflation, Russia and much else with a senior figure at an asset management house overseeing more than $500 billion of assets.

This news service recently spoke to Henrietta Pacquement, head of the global fixed income team at Allspring Global Investments, a firm running more than $500 billion of assets for retail and institutional clients.

Pacquement joined Allspring from its predecessor firm, Wells Fargo Asset Management, taking on the role of quantitative analyst before becoming portfolio manager and then head of the European investment grade business for Credit Europe in London. She has also worked in Paris at AXA Investment Management in a similar role. She earned a master’s degree in astrophysics from Cambridge University. She has earned the right to use the Chartered Financial Analyst® (CFA®) designation.

What is your view about investment grade credit in the current market environment (rising rates and inflation, post-Covid disruptions, the impact of the Ukraine crisis, and recovery, new sectors)? 
Pacquement: In the current market environment, we see the existing labour market pressures and supply chain bottlenecks persisting with the risk for inflation on the upside. 
In terms of the investment grade credit faced vis-a-vis the conflict in the Ukraine, whilst liquidity in names with exposure to the region have been challenged, wider liquidity has remained reasonable with two trading and the secondary market operating as normal, albeit at lower volumes. Primary market activity has certainly been more muted (more so in Europe than in the US) but issuers have still been able to tap primary markets where necessary. Year-to-date issuance for euro investment grade corporates (as measured by Deutsche Bank) is just over €50 billion, down 8 per cent year-on-year versus 2021.

We are overweight credit spread, given that spreads are now back to levels not seen since the end of 2018. We are neutral interest rate duration.

We have become increasingly selective when participating in primary markets. New Issue Concessions (NICs) have widened out recently (to 30bps+) as volatility has returned to the market and should be a source of returns as activity picks up. However, we don’t see a return to the bonanza that appeared amidst the Covid pandemic as credits are still awash with cash – that said stock buybacks are being kicked into the second half of this year. (Editor: new-issue concession is a term explaining the difference between the extra yield, or spread, investors demand to buy new bonds over US Treasuries and the spread on the company's existing bonds of a similar maturity just before the new bond sale is announced.)

We are overweight BBBs and BBs as credit fundamentals remain favourable. However, we are not planning to increase the allocation to these rating buckets. In recent months, we have built a cash buffer – which we will consider deploying as the market becomes more dislocated and opportunities present themselves.

Given how bond yields have been squeezed so hard over the past decade, forcing investors to re-think asset allocation, where does credit now sit in portfolios? Does the likelihood of changes to central bank policy, with energy prices shooting up, create new challenges?  
The impact of the Ukraine/Russia conflict will continue to put upside pressure on inflation which was already elevated following the post-Covid re-opening. Rising energy and commodity prices could in turn have a negative impact on longer-term growth.

This puts further pressure on central banks to be calculated and data-dependent as they seek to normalise monetary policy. We have already seen a moderation in the tightening schedule by the US Fed in March, moving by 25bps instead of the expected 50bps.

The prospect for investment grade credit this year appears positive as valuations look cheap to long term averages. The fundamental picture also looks supportive as the interest of creditors and shareholders are well balanced. 

What are the most promising areas of credit, in terms of expected returns, and what are you steering clear of? 
In terms of sectors, we currently favour real estate and telecommunications. Following the recently sell-off, selected corporate hybrids look attractive from a yield perspective.
We are underweight cyclicals and sectors that are energy intensive/dependent on commodities markets.

Have you had to adjust your exposures as a direct result of the Ukraine crisis? Have there been foreign exchange issues to take account of?
Our credit portfolios do not directly own any Russian or Ukrainian corporates or banks, nor do we own any local/hard currency Russian/Ukrainian sovereign debt.  We have limited exposure to corporate credits with exposure to the region.

Do you operate in the credit default swaps market to take positions on a basket of credits? Do you operate through derivatives at all?
We use credit default swaps on individual names and indices intermittently but generally favour cash bonds over synthetics.

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